Employment Law Watch : Employment & Labor Lawyer & Attorney : Reed Smith Law Firm

President Obama has signed the Department of Defense Appropriations Act for Fiscal Year 2010 (H.R. 3326). Section 8116 of that Act significantly restricts the ability of defense contractors and subcontractors to enter into or enforce agreements that require employees or independent contractors to arbitrate certain claims.

In particular, section 8116 provides that no funds appropriated under the Act may be spent on any federal contract in excess of $1 million that is awarded 60 or more days after the effective date of the Act, unless the contractor agrees not to:

(1) enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention; or

(2) take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates that the employee or independent contractor resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention.

Section 8116 also provides that no funds appropriated by the Act may be spent on any federal contract in excess of $1 million that is awarded 180 or more days after the effective date of the Act, unless the contractor certifies that each of its subcontractors that has a subcontract worth more than $1 million has agreed not to enter into or seek to enforce any provision of any agreement described above with respect to any employee or independent contractor who is or will be performing work related to the subcontract.

The Secretary of Defense may waive the application of these provisions to a particular contractor or subcontractor for the purposes of a particular contract or subcontract if the Secretary or the Deputy Secretary personally determines, with a specific explanation, that the waiver is necessary to avoid harm to national security interests of the United States, and that the term of the contract or subcontract is not longer than necessary to avoid such harm.

Congress is considering more sweeping restrictions on arbitration that would apply to every employer. The Arbitration Fairness Act (H.R. 1020, S. 931), which now has 106 cosponsors in the House and 11 cosponsors in the Senate, would prohibit the enforcement of all pre-dispute agreements to arbitrate employment disputes (other than in collective bargaining agreements), civil rights disputes, consumer disputes, or franchise disputes, and would require courts, rather than arbitrators, to decide the validity or enforceability of any such agreement.

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The Supreme Court has ruled that employees represented by a union cannot sue for age discrimination when their union and employer have agreed that any such claims should go to arbitration rather than court. In a 5-4 split, the Court held that so long as the collective bargaining agreement (“CBA”) between an employer and a union “clearly and unmistakably” includes discrimination claims among those disputes that must be arbitrated, union members subject to the CBA must pursue such claims before an arbitrator rather than a judge or jury. 14 Penn Plaza LLC v. Pyett, No. 07-581 (Apr. 1, 2009).

Background

The CBA in this case prohibited discrimination based on “race, creed, color, age, disability, national origin, sex, union membership, or any other characteristic protected by law,” including claims made under several federal laws listed by name, among them the Age Discrimination in Employment Act (“ADEA”). The contract said all such claims were subject to the CBA’s grievance and arbitration procedures “as the sole and exclusive remedy for violations.”

After the employer reassigned several union employees to other positions, they asked their union to file a grievance claiming that the reassignments violated that clause by discriminating against them because of their age, as well as running afoul of seniority and overtime provisions in the CBA. The union did so, but withdrew the age discrimination portion of the grievance before the arbitration was complete. The employees then filed an ADEA claim in federal court, but their employer moved to dismiss the suit based on the CBA provision requiring such claims to be arbitrated. The lower courts sided with the employees, holding that under a 1974 Supreme Court case, Alexander v. Gardner-Denver Co., a CBA could not effectively waive employees’ right to bring statutory discrimination claims in court. Although the lower courts recognized that the Supreme Court had since enforced an agreement to arbitrate ADEA claims in Gilmer v. Interstate/Johnson Lane Corp.(1991), they distinguished that case on the grounds that it had involved an individual agreement by an employee rather than a collective agreement by a union.

The Supreme Court’s Decision

The Supreme Court reversed the lower courts, holding that a CBA provision that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law. It first held that an employer and the union representing its employees are free to negotiate whatever lawful terms they believe appropriate to govern the employees’ terms and conditions of employment, and that under federal labor law such agreements should generally be upheld. The Court found that, as it had held in Gilmer, nothing in the ADEA precluded the arbitration of age discrimination claims so long as the relevant agreement clearly requires employees to arbitrate rather than litigate.

The Court rejected the employees’ argument that agreements to arbitrate statutory claims are suspect when found in CBAs instead of individual employee contracts, finding that the ADEA makes no such distinction. The Court distinguished its decision in Gardner-Denver as involving a CBA that covered only contractual disputes, not statutory claims. Here, where the CBA expressly covered statutory claims, and in light of Gilmer and other more recent cases favoring arbitration of such claims, the Court held that Gardner-Denver did not affect its conclusion.

The Court also dismissed the concern that a union and its members might have a conflict of interest over the union’s decision whether or not to pursue arbitration of a discrimination claim on behalf of certain employees. Writing for the majority, Justice Thomas said that the ADEA did not reflect any such concern, and that it was best left to Congress to decide how to resolve any such possible conflict. The Court also noted that if employees believed their union had improperly refused to pursue a discrimination claim in arbitration, they could always sue the union for breaching its duty to fairly represent all of its members or for itself having violated the ADEA. Finally, the Court held that it would not decide whether a CBA provision that allowed a union to block any arbitration of discrimination claims by refusing to act on the employees’ behalf amounted to an unenforceable waiver of the employees’ substantive rights. The Court noted that the parties disagreed over whether the union, after it stopped pursuing the age discrimination claim in arbitration, had offered to allow the employees to do so themselves, and that the parties had not briefed that issue.

Practical Effects

This decision gives employers the opportunity to avoid lawsuits and jury trials in discrimination cases by including provisions in their CBAs like that upheld by the Court, just as many employers have done through arbitration agreements with individual non-union employees since Gilmer was decided. But the decision leaves open many important questions that may limit its scope:

• Many if not most CBAs allow only the union, not individual employees, to invoke the grievance and arbitration procedure. In such cases, if a union decided not to take a discrimination claim to arbitration, it seems likely that the courts would allow the employees to pursue their claims in court lest they be left with no way to enforce their rights.

• Unions may be reluctant to add language to their CBAs like that in Pyett, fearing that if they do so, and then fail to pursue a discrimination claim through arbitration, the employee may sue the union for violating its duty of fair representation or discriminating against the employee.

• Congress may accept the Court’s invitation to address the issue. The Arbitration Fairness Act of 2009 (H.R. 1020), recently introduced in the House of Representatives, would ban all predispute agreements that require arbitrating any employment dispute, thus overturning Gilmer. Although the current version of the bill exempts CBAs from its scope, that provision will surely be revised to ensure that Pyett is reversed as well. If Congress passes such legislation, Pyett may prove to be a Pyrrhic victory for employers.

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